CASE ANALYSIS # 1

Problem:
Steve Morgan, controller for Newton Industries, was reviewing
production cost reports for the year. One amount in these reports continued
to bother himadvertising. During the year, the company had instituted an
expensive advertising campaign to sell some of its slower-moving products.
It was still too early to tell whether the advertising campaign was successful.
There had been much internal debate as how to report advertising
cost. The vice president of finance argued that advertising costs should be
reported as a cost of production, just like direct materials and direct labor. He
therefore recommended that this cost be identified as manufacturing
overhead and reported as part of inventory costs until sold. Others
disagreed. Morgan believed that this cost should be reported as an expense
of the current period, so as not to overstate net income. Others argued that
it should be reported as prepaid advertising and reported as a current asset.
The president finally had to decide the issue. He argued that these
costs should be reported as inventory. His arguments were practical ones. He
noted that the company was experiencing financial difficulty and expensing
this amount in the current period might jeopardize a planned bond offering.
Also, by reporting the advertising costs as inventory rather than as prepaid
advertising, less attention would be directed to it by the financial community.

Instructions:
a. Who are the stakeholders in this situation?
b. What are the ethical issues involved in this situation?
c. What would you do if you were Steve Morgan?

Answers:
a. Public, Bondholders, Stockholders, and Government
b. Honesty, Transparency, Objectivity, Integrity
c. If I were Steve Morgan, I should account for it properly thereby considering
it as period cost since it would benefit them in the computation for tax.
Also, if they lack funds they can borrow long-term loans because with longterm loans the interest rate is low and the period of repayment is beyond

one year which means that with this type of financing, the firm would be
able to generate cash that would be used for the repayment of debt when
it is bound to be due. Also, if possible, other advertising alternatives should
be considered and examined since there are different kinds of advertising
and some of them are not costly.

Submitted by:
Group 1
Members:
Go, Joebert A.
Lacpao, Reggiel Miel S.
Espiritu, Jansce Diovell C.
Laraga, Janice L.
Antoni, Lani G.
Badidles, Adair A.
Distrajo, Lincoln M.